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Over the course of the last several months, one of the most consistent debates in the circles of bitcoin enthusiasts has been whether a blockchain can function successfully without the “inconvenience” of its underlying cryptocurrency. With larger, more traditional firms stepping into the space, they hunger to create a permissioned, proprietary blockchain that will allow them to harness the power of this new ledger technology. In this post, I will explain not only why separating the blockchain from bitcoin is a ludicrous endeavor – but why the blockchain represents a snapshot image of the digital economy at any given point in time due to the nature of peer-to-peer timestamp verification.

20th century business models need not apply

If we are to create an application with the blockchain, perhaps some groundbreaking new innovation harnessing the invention of the bitcoin payment system, we must first understand the core solution that the technology brings and how that applies to our existing business model. Among other things, the solution blockchain technology brings to the fold of information security is that of solving the byzantine generals problem – a problem in computing science which made relying on trusted third parties to relay information accurately. Before bitcoin arrived to the scene, this computational problem was thought to be unsolvable.

The value of conjuring up an eloquent solution to this computing problem cannot be understated. Not only does this innovation open up our society to the prospect of digital scarcity, but it introduces a business framework where the operational capacity of any application, which would otherwise have inherent risks due to centralization, is able to be highly decentralized.

With centralization comes trust, and too much of it is often a liability. With realiable decentralization, we are opening the frontier of the 21st century on a promise of open-source, trustless, and non-exclusive commerce.

Shortsightedness Leads to Disruption

Why are businesses which require a good deal of trust interested in blockchain technology?

The shortcomings in a situation where companies desire to take blockchain technology and make it their own, make it closed, make it proprietary, does not represent an underlying inadequacy of cryptocurrency. Rather, the shortcoming is in the rashness of perceiving a transition technology with a status-quo mindset.

If you wish to consolidate and centralize the operations of a business, why look to bitcoin (a technology for, as we discussed, removing trust through decentralization) to amplify that capacity? The companies and individuals who approach bitcoin technology with a 20th century mindset will find no success. They will desperately reach to harness the innovation of Satoshi Nakamoto, and in doing so, will slowly realize that the killer application of this technology is to render business models based on trust obsolete. Bitcoin is an evolution in our concept of the corporation, and a blueprint for decentralized, trustless, openly accessible commerce in the 21st century.

The Blockchain is a Monetary Image

For the purposes of illustration, let us assume there exists two users on a blockchain – User A and User B. User A controls 3.0 million bitcoin on the entire network. User B controls 3.6 million. There also exists 14.4 million unmined bitcoin.

User A has used their private key to authorize a transaction to User B worth 1.8 million bitcoin. User A sends this amount to User B’s public key. At this point, the transaction has been authorized by User A and is in the process of being confirmed by miners of the network.

After the transaction has been confirmed, the bitcoin network now reflects the change in hands (change in wallets) of the 1.8 million bitcoin User A sent User B.

No currency has moved from point A to point B, but an authorization on behalf of User A to alter the network in a way which increases User B’s control of the blockchain by 1.8 million bitcoin at the expense of User A. In bitcoin, this ledgered payment system is the money supply and is radically different from any type of money we have previously seen.

When an individual makes a transaction on the bitcoin network, no actual currency is moved. That is, no file has moved. No commodity or asset has moved. No private or public key has moved. Rather, the only thing which changes is the percentage of the blockchain ledger which User A & B claim control over. When a transaction occurs in the realm of bitcoin, the image of the blockchain is altered. Nothing ever changes but the composition of this blockchain record.

The blockchain is a recorded snapshot of the bitcoin digital economy.

Money is now an image, rather than something which can be separated from the system itself. This image of money is being constructed, altered, and verified by the thousands of machines acting as miners across the globe, and it’s a composition on public display for all to see. The miners are the painters of this network composition. The users, the brush and strokes.

“Tangible money, old-fashioned money … is a phantom from the past, an anachronism. In its place is an entirely new form of money based not on metal or paper, but on technology, mathematics, and science. This new ‘megabyte’ money is creating a new and different world wherever it proceeds. Money now is an image.”

– Joel Kurtzman, The Death of Money

Put simply, separating the blockchain from bitcoin is ludicrous because there is nothing to separate! They are one in the same. Without the blockchain, you have no bitcoin ecosystem. Without an accompanying cryptocurrency, you have no measuring tool to determine the ownership of the blockchain.

A payment conducted with bitcoin represents a paradigm shift in our concept of money – one where there is no division between currency and the system through which it flows.

With the intrinsically valuable property of decentralization (solving of the byzantine generals problem), we have a monetary system that comprises a snapshot of purchasing power at any point of time in its existence. The timestamping function of the blockchain allows anyone to go back and publicly determine the holdings of any address (and perhaps soon any individual).

In the bitcoin digital economy, money is an image continuously being constructed, verified, and reattributed by way of cryptographic authorization.

Author

Travis Patron is the author of The Bitcoin Revolution: An Internet of Money, a seminal publication in the digital money space which outlines the basics of the bitcoin payment system. As a public speaking authority, he regularly speaks to audiences on the economics & industry trends of bitcoin.

Yoshi Yoku

04 08 2015

Why do so many people insist that such an innovation needs to be bent, altered, and twisted to the whim of existing firms? Can they not see that the invention of bitcoin is convicted in its own independance? It has no limitation constricted by the intentions of man.

All the largest finance firms of today are looking at blockchain technology and asking “how do we make this ours”? In reality, they should be asking “how do we make ourselves part of this”?

Vlad Dramaliev

06 08 2015

I get the article, but I can’t understand the following: These companies that you are talking about, they are not only creating their own blockchains, but assets to be stored in these blockchains. In fact, they are not separating bitcoin from the blockchain, they are simply creating their own blockchains with their own assets to be stored on them, assets with properties which are more suitable to their business models. The bitcoin blockchain is simply the most decentralized and most secure, but they will create their own, AND CENTRALIZED ones. So, who in fact is trying to separate bitcoin and the blockchain?

Travis Patron

06 08 2015

What I cannot understand, is why would a company choose to use blockchain technology if they are aiming for a centralized solution? Decentralization and non-excludability seem to be the tenants of the bitcoin framework.

If a company is looking to create their own network with their own assets to be stored, surely there is a better alternative for this than the decentralized ledger of the blockchain?

If a company is seeking to create a permissioned, controlled network, then why not simply use some sort of enterprise cloud solution?

06 08 2015

Travis Patron

06 08 2015

From what I can tell, and the conversations I’ve had with large banks such as BNY Mellon, it seems they recognize the potential of this technology but are unclear on how to harness it.

What I am referring to in this article, is how companies who seek to “lock down” the blockchain and make it a proprietary, closed system, will falter. More so, there has been plenty of conversation in the industry lately about how the blockchain is great, but the currency of bitcoin is not needed. I am making the argument that they are one in the same – that separating bitcoin from the blockchain is akin to separating the oxygen molecule from water.

If you do so, you’ll be left with something different entirely.

Vlad Dramaliev

07 08 2015

I agree, and yes, they are trying to use the blockchain without bitcoin, but I am still not 100% sure they cannot do that. Time will tell.

David Dire

16 08 2015

This is a great article. It’s not often you see math translated into its visual form – which is just as valid as its numeric expression – the way you’ve done here. After reading this, I can see Bitcoin/Blockchain almost like a Monopoly board.

Which leads me to a question, do you think in the future there will be some way to monetize that section of the blockchain ‘owned’, like property but in an altogether different form? Of course, in some ways it already is because it has value consensus and can be converted to fiat, but I’m really wondering if there is some other way.

I guess I’m thinking somewhere along the lines of that ‘space’ being something like a billboard space, or a kind of mathematically defined area that can be utilized for some other kind of contract.

Travis Patron

17 08 2015

I think you’ve opened up an entirely new can of worms with this thought David.

What would this ‘space’ on the blockchain which is under control of one entity be capable of?

For one things, this space would represent a given amount of purchasing power (dependent upon the current market price of bitcoin). It would also represent a sort of consumption index of hashing power that is being used to verify the entirety of the blockchain. Perhaps this space could also be used to store files publicly much like a decentralized dropbox.

In my own estimation, over the long-term, we will see very powerful applications built on top of the blockchain network – one of which I believe will be artificial intelligence. When that happens, could control of this space on the blockchain represent a computational index for an artificial intelligence?

David Dire

25 08 2015

‘we will see very powerful applications built on top of the blockchain network – one of which I believe will be artificial intelligence. When that happens, could control of this space on the blockchain represent a computational index for an artificial intelligence?’

That’s a very interesting thought, Travis. AI on the blockchain that governs a persons everyday smart contracts perhaps. One way or another, I think there’ll be some amazing outside-of-the-box applications of the blockchain in the future.

ps: Keep up the good work, your articles are a cut above the vast majority. Really enjoy them. Thanks

Jon

02 02 2016

Travis,

Thank you for your work. There a number of very interesting points to discuss here, and it is interesting to think of bitcoin as an image. However, I really don’t understand why you think Bitcoin and blockchain cannot be separated. The way I think of it, it’s similar to an actual real world physical mining operation. The mine needs rails and rail cars to move the rock, but the cars/infrastructure doesn’t care if it’s gold, iron ore or any other type of rock, it just delivers the goods from point A to point B. The blockchain is the digital infrastructure to hold and move assets, and bitcoin is just one of many potential assets. I understand that on the blockchain, it is more accurate to say it changes control from one user to the next, but a transfer in control is really a transfer of an asset, even if the asset does not move. We can digitize the title of any asset, and store any digital title on the blockchain securely (which I think is bound to happen sooner rather than later), and then securely transfer it with no third party trust needed. If it’s on the bitcoin blockchain, yes, it needs a bit of bitcoin for the miners to verify, but this can also be done on other non-bitcoin blockchains, and can be done with other non-proof-of-work methods. Private vs. public is not the overriding issue from a technology perspective, and I suspect we will have lots of both. Simply put, transferring assets takes time and costs money, and can be done more securely, faster and cheaper on a blockchain with smart contracts, such as on the Ethereum blockchain, and these transactions having nothing to do with bitcoin. In your mind, are bitcoin and Ethereum interchangeable, so in essence you are arguing you can’t separate the underlying currency that pays for mining from the innovation of the blockchain, otherwise you have something new and different? This would imply that proof of stake or a Federated Consensus Protocol are different animals from the bitcoin blockchain, which may deserve more scrutiny for security reasons but is still blockchain technology, wouldn’t you agree?

Also, people don’t often clearly think about bitcoin as a currency behaving naturally to the way it was designed (intentional fixed/ limited supply), and that if they had introduced different properties, it would have behaved differently. Limited supply fixes some issues, introduces others, but ‘other’ currencies will behave differently, and real world currencies will behave differently still. The people attracted to bitcoin were a monolithic group in that it was the only option, however many within the group of all those who purchased it were doing so for different reasons. As other options come online that fit their needs more closely, this group will fracture so each person will use the crypto-currency that best suits their needs. I doubt very much most people in China really want bitcoin per se, they just want an asset in the cloud where they can safely store value. If they were offered a secure digital Yuan, my guess is most would prefer that, as it stores the value they have, and the value that they use for purchase money. i understand bitcoin solves specific problems that other digital currencies cannot, but I see a future where every asset has digital title, and those titles are stored and transferred on the blockchain. These will have nothing to do with bitcoin, and long run, the innovation of blockchain will be massive and release tremendous productivity gains/$ savings, while bitcoin will serve an important but limited niche. Separate, not equal, but both important on their own. What am I missing from your perspective?

Travis Patron

08 02 2016

Just as you mentioned previously Jon, money is a stored productivity measurement. An abstract concept and a proxy for labour. If we remove the abstract measuring tool of a football game (the yard), that game becomes impossible to play. Similarly, if we remove the abstract measuring tool of a global ledger (the bitcoin), that game too becomes impossible to play.

Your analogy of the mining carts needing rails and rocks to operate is accurate. The blockchain is indeed the rails. However, when there be no iron ore (read bitcoin), there be no need for the rails in the first place. Without bitcoin (the unit of account), the blockchain cannot exist.

Everywhere you look, you will find a blockchain that has an underlying incentive mechanism necessary for the network to operate. Without this incentive mechanism, you are dealing with something other than blockchain technology entirely.

It’s possible that we may have private blockchains, but if such a technology is stand-alone, I cannot see how it would compete with open, permission-less innovation. Expecting a stand-alone private blockchain to compete with the bitcoin network is as unlikely as a private company intranet competing with the world wide web.

If such a blockchain is built on the Ethereum platform, it could retain a “walled garden” model and still be effective for niche applications. Ethereum is fundamentally different from bitcoin however, as a sort of fuel (gas as it is called) is necessary to execute the computational cycle of smart contracting systems.

I am not arguing that separating the underlying currency from the innovation of the blockchain is impossible. I’m arguing that this underlying currency does not exist in the first place! What you are buying ownership of is the blockchain ledger (I call this ledger bitcoin)itself – not a virtual currency, but a digital protocol for reattributing ownership of data.